Segmented Trading Markets: Competition, Fees, and Tax Policies
60 Pages Posted: 1 Jun 2022 Last revised: 2 Dec 2022
Date Written: May 1, 2022
We study competition among segmented trading venues in which the venues differ in technology (fast vs. slow). Technological differentiation leads to higher trading fees, but has an ambiguous impact on trading volumes. Improvements in the slow venue increases trading volumes, whereas improvements in the fast venue might increase or decrease it. We also study the welfare effect of tax policies. In equilibrium, the tax rate to optimize tax revenue depends only on trader preferences, and is thus independent of the venue competition. With non-constant welfare weights the aggregate welfare can be maximized at nontrivial tax rates.
Keywords: Segmented markets. Digital economy. Crypto market. Competition.
JEL Classification: C7, D86, G2, L13, L86.
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